Ask the Author Live: Larissa MacFarquhar with Paul Krugman

This week in the magazine, Larissa MacFarquhar writes about Paul Krugman. Today, Krugman joined MacFarquhar to answer readers’ questions in a live chat. A transcript of their discussion follows.

LARISSA MACFARQUHAR: Hello everyone, thank you for joining us. Professor Krugman, welcome. Professor Krugman will now be answering questions for the next hour, so feel free to send him one.

QUESTION FROM BILL PAPADAKIS: I have noticed that The Return of Depression Economics and the Crisis of 2008 (as well as its previous edition) does not contain any footnotes or references, which seems to be in contrast with most books written by economists. I wondered if that was a conscious choice on your part or more of a technical issue?

PAUL KRUGMAN: Well, this was a book written for a broader audience, so it wasn’t supposed to be laden down. Also, much of the material was written in a white heat (the original version was 1999, but I revised it for the current crisis, basically over two weeks in Oct. 2008), so not so much scholarly apparatus.

QUESTION FROM MAURICIO MEGLIOLI: Dear Mr Krugman: I am very concerned about the current economic situation in the U.S., and in the first world countries. I seem to me (from a distance) that many of the things that happened in Argentina few years ago are now happening in U.S.: falling banks, job losses, auction houses, debt, etc.. In Argentina we have made every political and economical mistake possible for the past 100 years. So, we may deserve it… But, how has this happened to you? How was not prevented it? On the future: What type of economy is facing the world? Is this going to be a more radical phase of capitalism? We all should compete like slaves? Where is China taking all of us? Regards, Mauricio

PAUL KRUGMAN: I’m afraid that the line between troubled developing countries and supposedly sound, mature countries isn’t as sharp as we’d like. It’s worth remembering that Argentina was praised for its wonderful policies as late as, say, 1998; pride goeth before a fall. I guess the point is that rich countries can get sloppy and foolish too. And we’re having a really hard time breaking through the ideological barriers to effective action.

QUESTION FROM STANLEY SMITH: Has the president been a disappointment to you and are you ready to abandon President Obama?

PAUL KRUGMAN: Well, I’m disappointed—but you go to crisis with the president you have. Look, Obama is smart and well-intentioned; I agree with the direction of just about all his policies. What he’s lacked is sufficient urgency and force—plus it’s hard to do things with a relentlessly obstructionist opposition, plus the need for a supermajority. But I still have hope— for example, after a worrying lack of leadership for several weeks, he seems to be pushing hard for health reform again.

QUESTION FROM PATRICIA VADASY: If the Krugmans have pulled out of the stock market, I take serious note as an already nervous non-economist small investor. But without defined pension benefits, bleak prospects for Medicare and Social Security, what would a middle aged person do with her savings to plan for even some shorter retirement period?

PAUL KRUGMAN: You should know that in general I’m not a good stock prophet; I didn’t see the big 2009 runup, for example. I’m only any use here when there’s a huge bubble, as in 1999.

As for retirement planning: I really think that people have to think safety; taking risks for higher yield is a bad idea once you’re in late or latish middle age. Oh, and I wouldn’t worry too much about risks to Social Security or Medicare—barring a complete right-wing takeover, those programs will be there for a long time.

QUESTION FROM SEAN DOYLE: What would be the highest federal marginal income tax rate that you would deem acceptable?

PAUL KRUGMAN: Good question. I don’t advocate a marginal tax rate of 70 percent, but it’s worth noting that we had rates in that range all through the 60s and much of the 70s, without much evidence that effort at top levels was being crippled. So that’s feasible. That said, the truth is that the financing of social insurance is much more important than the progressivity of the tax system—Sweden pays for a lot of its programs with a regressive VAT, but that doesn’t change the fact that it takes much better care of the poor and unlucky than we do.

QUESTION FROM SUSAN HANSEN: Isn’t what we’re seeing now in the USA what always happens as Empires decline? “All Empires commit suicide.” The rulers make stupid decisions, the ruling class becomes overly greedy, the currency is devalued, more and more strictures are put on the citizens, and the military is over-extended and can’t defeat the “barbarians”.

PAUL KRUGMAN: I love that kind of thinking, but my guess is that post-industrial empires don’t follow the same rules as pre-industrial; for better and worse, Rome we’re not. And you know, we’ve been through this kind of period before; I remember how depressed everyone was in the mid-70s, and yet we found new sources of dynamism. I’m not ready to open the gates to the Visigoths just yet.

QUESTION FROM THESSALY LA FORCE: Paul, love the picture with your cats. What do you think about it?

PAUL KRUGMAN: I think I need to lose some weight. Otherwise, fine. One blog comment on Larissa’s article was, “Too much about you, not enough about the cats.”

QUESTION FROM KAREN OTTEN: I’m guessing your undergraduate textbook is more important work than deep research looking at questions such as why is so much of the world poor would be; however I suggest that a textbook for upper high school grades might actually begin to help this country crawl out of a black hole of stupidity; might there be such writing in your future?

PAUL KRUGMAN: Actually, yes. We’re in discussions with the publisher about a version of the textbook that would work at less-demanding community colleges and advanced high school; we’ve even had some focus groups with instructors. What’s clear, though, is that it will take a lot of work—it’s not a matter of dumbing down the current text, it’s a shift in style to a more discursive, less diagram-heavy exposition. So it will be a multiyear project.

At the same meeting, the publishers weren’t that keen on my idea of a Twitter edition.

QUESTION FROM IRVING FISHER: Do you want to go down in history as the Irving Fisher of your time?

PAUL KRUGMAN: I think I already missed my chance—I haven’t declared that stocks are at a permanently high plateau thanks to the effects of Prohibition.

Seriously, though, Fisher is a good example of the difference between analysis and prediction. A great economist, a terrible forecaster. I don’t think I equal him on either dimension.

QUESTION FROM PAUL DAVIDSON: Since their beginning in the Post World War II era, Post Keynesian economists have been arguing that mainstream economic theory (whether labelled Keynesian or classical) was going down a a wrong track. They argued that the proper Keynes policies for fighting inflation were (1) a buffer stock to prevent commodity price increases and (2) an incomes policy to prevent inflation due to money wages and/or profits per unit of output from rising faster than productivity. They also argued that the financial system was potentially exceedingly fragile and required regulations such as the Glass Steagall Act. Finally to prevent international payments problems they urged the adopting of an international clearing union along the lines developed by THE KEYNES PLAN that was presented at the Bretton Woods Conference and vetoed by the US delegation who instead urged the development of the IMF and the World Bank. Given what has happened during this Great Recession and the Great Inflation of the 1970s as well as the “Great Moderation in thr 1980s and 1990s, what is your opinion of the policies advocated by these Post Keynesians? Do you see any possible acceptance of such policies by politicians and their economic advisors?

PAUL KRUGMAN: Hi Paul! I think we can usefully look at the Post-Keynesian material, although I don’t buy all of it; more than that would be too wonkish for this chat, I think. But you and your colleagues are right to say that macroeconomics tried too hard to be just like micro, with rigor driving out realism. By the way, you don’t have to be a Keynesian to worry about financial fragility—even Adam Smith wanted strong bank regulation.

QUESTION FROM GUEST: Do you think it is ideological barriers that prevent progress or is it just old fashioned cronyism and greed?

PAUL KRUGMAN: Keynes told us that in the long run it is ideas, not vested interests, which are dangerous for good or evil. He also told us that in the long run we’re all dead … But anyway, I think that both interests and ideology are a problem—and you shouldn’t understate the power of bad ideas. Lousy monetary policy isn’t in anyone’s interests, but modern versions of the gold standard mentality still flourish because they appeal to many peoples’ prejudices.

QUESTION FROM NATE: Do you see the news about the USA’s creditors possibly downgrading our credit rating because of our growing debt as overblown? Do you perceive a tension between using Keynesian methods to recover from the slump and not pushing the debt too far, or do you advocate doing the maximum possible intervention. And if it’s the latter how am I to make sense of the constant alarm about USA’s credit rating being raised in the news?

PAUL KRUGMAN: There are limits to the amount even the US can borrow, although we’re quite some ways from that now. So for now I would disregard the deficit hawks.

As for the ratings agencies: since when have they been right about anything?

I’m especially baffled by the idea of taking insurance against a U.S. default. If America defaults, we’re talking about a chaotic world—Mad Max, more or less—in which case, who imagines that insurance claims will be honored?

QUESTION FROM JAMES MOORE: Any prediction if we adopt a policy to drastically cut spending?

PAUL KRUGMAN: Great Depression 2.0.

QUESTION FROM ERIK DONNELLA: Would you explain a little bit about why a federal sales tax is a bad idea, and what the social value is of a graduated income tax and progressive taxation scheme?

PAUL KRUGMAN: Actually, it’s not a bad idea. There is a case for progressive taxation, since the well-off can afford to pay more even as a percentage of income. But most other advanced countries do have a VAT, which is in effect a national sales tax.

There is a question about whether we should try to have a progressive consumption tax. But those proposals always strike me as too complex. If we end up supplementing income taxation with a modest VAT, I won’t complain.

QUESTION FROM LARRY JOHNSON: The idea that the government multiplier on spending could be more than 1 seems totally counterintuitive when there is so much waste in Washington—how can I suspend my disbelief?

PAUL KRUGMAN: It has nothing to do with waste or the lack thereof; it’s about demand. Remember, we recovered from the Great Depression thanks to World War II—massive spending that was actually destructive rather than productive. When we’re in a sustained slump, you really need to realize that getting workers employed, rather than using them efficiently, is the key issue.

OH, AND EVEN GIVEN THAT: government isn’t nearly as bad—or the private sector nearly as good—as it’s often portrayed. I know I lot of very good, very hard-working government employees; and while I don’t work for a large corporation, I do read Dilbert.

QUESTION FROM CHRISTIAN: Hi Dr. Krugman. I’m curious about what you normally read in your free time, if there is any left. Do you find most of your reading material from other blogs or from primary sources? Any favorite writers?

PAUL KRUGMAN: Well, I don’t seem to have much free time these days! But when I want to get away from economics and politics, I read history—right now I’m going back to reread some of The Last Tycoon—and novels, some sci fi (I have an early galley of Charlie Stross’s latest, and you don’t, ha ha), some historical (I love Alan Furst).

PAUL KRUGMAN: I meant The First Tycoon!

QUESTION FROM ERIK DONNELLA: Why should (or shouldn’t) health insurance be for profit?

PAUL KRUGMAN: I think at a fundamental level the point is that what we want is broad coverage—it’s a widely shared social goal—but that’s not what private insurers are trying to achieve; from their point of view profits are maximized by not covering those who need it most. Long ago we made the decision that seniors should have guaranteed coverage via Medicare; there’s no real reason to apply different logic to those under 65.

QUESTION FROM GUEST: How do you evaluate the possibility of EU member states’ abandoning the euro and returning to their own currencies? Do you foresee a PIIGS crisis in the eurozone?

PAUL KRUGMAN: As a technical matter, it’s almost impossible to leave the euro—any country that even began the process would face the mother of all bank runs. You’d really have to have financial collapse first. I don’t think there’s been an orderly breakup of a currency zone since the partition of the Austro-Hungarian empire, and if I remember this required things like closing borders for extended periods.

QUESTION FROM DAVID SPETT: What are your thoughts on the Fed’s decision last week to increase the discount rate? I’m a complete layperson on economic issues but it struck me as a bit premature.

PAUL KRUGMAN: I think it was meant mainly as a technical cleanup—just a reduction in the aid to banks, not a contractionary policy; and maybe also as a non-substantive sop to the inflation hawks. At least that’s what I hope. if it’s really the beginning of real tightening, God help us.

QUESTION FROM PJMA: Do you think US economy is in the middle of a liquidity trap?

PAUL KRUGMAN: Of course we are. A liquidity trap is a situation where the normal tools of monetary policy—purchases of short-term government debt through open-market operations—lose traction, because those rates are already near zero. And they are! So it shouldn’t even be a subject for debate.

QUESTION FROM TOM: What would you rather have, your Nobel Prize or your condo in St. Croix?

QUESTION FROM RICHARD BUTRICK: What risk did the money center banks take? The subprime loans were guaranteed by Fannie, Freddie and Barney.

PAUL KRUGMAN: I’m replying to this because it’s so important to know that it’s completely false. Fannie and Freddie were latecomers to subprime, and played a minor role in the explosion of irresponsible lending. And they definitely didn’t guarantee the risks the money center banks took.

QUESTION FROM GORDON MOAT: Why not simplify the US tax system to create a flat income tax? Is it simply impossible due to the number of people the current system supports, and that changes would create unemployment?

PAUL KRUGMAN: A flat tax would either (a) be much higher for most people than the tax they currently pay or (b) raise much less revenue than the current system. Given the level of inequality, there’s a lot of money coming from people in the top two brackets.

QUESTION FROM NOEL CASSIDY: to prevent another depression what would you sacrifice?

PAUL KRUGMAN: I’m personally willing to face higher taxes as the price of a more secure and more just society. And yes, Robin and I are doing well—not Masters of the Universe well, but well enough that the tax changes I support will cost us a significant amount, while the expanded social insurance I want won’t help us.

QUESTION FROM KEVIN S.: How did you first hear “The Krugman Blues”? Was it emailed to you like a thousand times that first day? How did it feel to be immortalized in song?

PAUL KRUGMAN: I got maybe two dozen emails; not as many as for “Hey Paul Krugman”. And hey, it’s cute to get this kind of recognition, even if it’s about the “pissed off look on his face”

QUESTION FROM SEAN DOYLE: How should we handle the coming medicare issue?

PAUL KRUGMAN: I basically buy the view that Medicare spends a lot for care that’s of little or no medical value. So we can probably curb spending growth a lot with fairly simple, low-impact measures to ensure better use of clinical evidence, plus a push for more integrated care. I guess the way to look at it is that Medicare actually is a single-payer system, so that’s a place we ought to be able to emulate some of the cost-efficiency of other countries’ systems.

I guess that makes me an advocate of death panels.

QUESTION FROM PABLO: What has been your biggest mistake regarding an economic theory? Something that you say today “I was wrong…”

PAUL KRUGMAN: Oh, that’s easy. I was highly skeptical of the argument that currency crises could arise out of sheer self-fulfilling prophecy—an argument first pushed forcefully by Maury Obstfeld at Berkeley. After the Asian crises of 1997-98, I threw in the towel, and agreed that he had been right all along.

LARISSA MACFARQUHAR: Professor Krugman, thank you so much, that was positively Olympian. Thanks to everyone for tuning in, and apologies to people whose questions were not answered.

The New Yorker offers a signature blend of news, culture, and the arts. It has been published since February 21, 1925.